There are quite a few jokes floating around asset management circles about the lack of sophistication exhibited by the average Chinese investor compared to more experienced investors from the West. But… well, the joke is on them because this lack of sophistication is temporary at best and in some cases, such claims actually turn out to be baseless.
One example of such instances is represented by exotic assets, from domain names to cryptocurrencies. Realistically-speaking, domain names as an asset class have not even been around for a quarter of a century, whereas cryptocurrencies are celebrating their one-decade anniversary. Yet despite the novelty of these assets, both industries have become increasingly dominated by Chinese capital over the past few years.
I am actually the only economist who covered the Short Domain Mania of late 2015 to early 2016 (in both of my books), a phenomenon which mostly came about as a result of interest from China. Allow me to elaborate: the mania in question is related to short domains (three-letter dot com domains, three-number dot com domains, four-letter dot com domains and the list could go on and on), mostly because Chinese investors can allocate capital in this direction without there being a language barrier involved (like with one-word domains, for example). While these domains have been considered valuable let’s say ten years ago as well, it was Chinese interest that bought them into the spotlight in a systemic manner. Even more so, the rules have been re-written by China when it comes to which short domains are more valuable than others.
As such, three-letter or four-letter domains without the letters AEIOUV became the most valuable category, called “Chinese Premium” domains due to the fact that those letters do not exist in Pinyin and the abbreviation potential of domains containing the letters in question is therefore limited. In the past, AEIO were considered “the best of the best” in terms of letters, for comparison.
The same way, three-number or four-number domains which contained let’s say the number “8” became more valuable than others due to the positive connotation in China, whereas domains with the less desirable “4” were considered less valuable. Again, these rules have changed exclusively due to the Chinese variable.
The effect of this newly-found interest from China?
Let’s just say that for example “Chinese premium” four-letter dot com domains which could have been bought for a mere $8 or less in 2009 or 2010 (the standard registration fee, since the domains were actually available after a failed attempt at registering all four-letter dot coms, failure brought about by the Great Recession… ironically, most domains that are considered Chinese premiums today were perceived as the worst of the worst back then) ended up selling for over $2,000 in late 2015 to early 2016 and the same way, pretty much all short domain categories experienced a tremendous jump.
Cryptocurrencies do not represent an exception.
While I am no longer the only economist out there who covered this asset class properly, I’ve been vocal enough over the years to believe in my ability to keep my finger on the pulse of this industry as well, an industry that is currently being dominated to a very significant extent by capital from China. Ironically, the Chinese domination is so profound when it comes to the mining sector of the crypto space that it risks jeopardizing the very decentralization cryptocurrencies became famous for.
Simply put, there is so much mining going on in China (due to opportunities brought about by cheaper energy costs as well as other variables) that Chinese mining interests control well over 50% of today’s crypto mining activities, making it technically possible (albeit unlikely) for these miners to even reorg the blockchain (for example, decide to eliminate a recent transaction or multiple transactions from the blockchain). While the cons associated with doing this would most likely exceed the pros, it shows to which extent Chinese domination is manifesting itself in the crypto space.
From mining to new crypto projects and a lot of the capital poured into existing ones (most notably bitcoin, of course), it’s impossible to make sense of what’s happening in the cryptocurrency world at this point without paying significant attention to the Chinese variable. From mining cartels which even make some question the decentralized nature of crypto (at least the mining dimension) to so-called “whales” that move the market though the sheer volume of capital they control, there’s just no escaping China.
As can be seen, while the above doesn’t “prove” that the average Chinese investors is extremely sophisticated (as the previously mentioned dominance when it comes to exotic assets such as domain names and cryptocurrencies) has been orchestrated by relatively small groups of investors, it does make it clear that questioning the ability of Chinese entities to dominate even the newest sectors of the investing space is most likely not the wisest of approaches.